Austria Projects Mild Recession in 2009

Eurozone member Austria is slipping into a recession these days that will last during 2009, the Austrian central bank said in a press release on Tuesday.

Austria has been hit especially hard by economic woes in Eastern Europe, the traditional backyard of Austrian companies and banks that have been expanding into this region since the fall of the iron curtain in 1990.

Thanks to a strong first half of 2008, Austria will be able to record an overall GDP growth figure of 1.6% this year. The rapid economic contraction in Europe spells near term problems, though, leading to 0.3% lower GDP in 2009. 2010 should bring a reversal again with the Austrian central bank forecasting a 0.8% higher GDP again.

Compared with the last projections from June 2008, the central bank has reduced its growth forecast for 2009 and 2010 by 2 and 1.6 percentage points. This is mainly based on lower private consumption growth and sinking gross investment expenditures. Like most Eurozone countries, the Austrian economy suffers from a rapid change in sentiment among both companies and consumers. Austria has not yet embarked on the irresponsible path of stimulus packages currently being discussed in France, Germany and Spain. In the long term, such stimulus packages are nothing more than an anticipation on future tax revenues with the additional burden of the interest to be paid for these loans.

Unemployment is expected to pick up to a 2009 rate of 4.2% after 3.7% this year.

Austria's federal debt will rise from a current 59.3% of GDP to 61.2% in 2009 and 63.1% in 2010.

Real wages are forecasted to rise 1.2% in 2009 after a 0.1% contraction in 2008.

The only bright spot is inflation, which is forecast to drop to 1.4% in 2009 after a 2008 average of 3.3%. These figures are distorted by changes in the goods and services basket, which has become misaligned with actual consumer needs by overweighting those goods that rose slowest in price while reducing the weightings of government and private services.

Austria's stellar savings rate of 12.7% of disposable income is expected to rise to 13.6% in 2009 and 13.7% in 2010. But this high savings rate distorts the real picture stemming from a continually growing gap between the wealthy and the growing class of the working poor.

My anecdotal evidence shows that both consumers and companies have been shelving plans for outlays due to a very cautious behavior of Austrians in the light of bad news being reported on a daily basis.

As in most European countries, big ticket items are becoming harder to sell with every new day, which especially hits consumer goods sales.

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